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Domino's cautiously confident on U.S. growth

While the pizza chain anticipates domestic growth, it expects international markets to offer stronger potential for expansion

Domino’s Pizza executives said the chain’s reformulated pizza and international growth fueled third-quarter sales gains throughout the system.

J. Patrick Doyle, chief executive of the 9,541-unit chain, said during a conference call with investors that Domino’s 3-percent domestic same-store sales increase, compared with an 11.7-percent result a year earlier, showed that its recent sales success was more than a temporary spike from introducing a new, reformulated pizza.

“This was a sustained improvement from greater customer frequency and retention,” Doyle said.

Doyle also underscored huge potential for the chain’s international business, which recorded its 71st consecutive quarter of same-store sales increases, with an 8.1-percent gain this quarter compared with a 7-percent increase a year earlier.

Domestic growth, however, will be cautious, the company said, as the overall economy remains tepid and commodity prices hamper efforts to make long-term plans. Domino’s commodities basket price rose 8 percent in the third quarter, chief financial officer Michael Lawton said, including a spike in cheese prices to a high of $2.08 per pound before settling at $1.79, compared with an average of $1.53 in last year’s third quarter.

U.S.: Cautiously confident

Doyle said domestic same-store sales and margins were helped by labor-saving moves like a carryout focus, an in-sourced call center and digital ordering, but he added that the chain was still weighing the effects of other economic factors.

“When cheese spikes above $2 a pound, that has some real short-term impact,” he said. “Our confidence is good, but still a little bit qualified, until we see it flow through more on the bottom line. Financing is there for the larger players, but it hasn’t opened up materially for a new franchisee or somebody with maybe one store looking to open a second.”

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He added that Domino’s would be “cautious and respectful” regarding pricing moves it passes through to the franchise system. Marketing in the near term will continue to balance value and premium products, like the new Artisan Pizzas.

The large, three-topping pizza for $7.99 carryout special “continues to be something we’re pleased with,” Doyle said. That same price point is the introductory offer for the chain’s new Artisan Pizzas, which Domino’s aims to make part of the permanent menu.

“Artisan Pizza sales weren’t part of the third-quarter results, but we’re optimistic for the fourth quarter,” he said.

Carryout business crept up slightly, to a little more than one-third of all transactions in the United States and abroad, Doyle said. That helped not only to bolster traffic on slow Monday, Tuesday and Wednesday evenings, but also to help Domino’s improve its restaurant margins through labor efficiencies.

He added that the national promotion of two medium, two-topping pizzas for $5.99 each continued to be a positive driver for Domino’s, even though most orders come with local offers and coupons.

“The national promotion is always a small percentage of the orders,” Doyle said. “We give guidance to operators in the system as to where the opportunities might be to find a little bit of margin here and there [with different discounts], but we’ve got to be careful. There are still headwinds for consumers, so we’re going to be cautious until we see the ability to do anything more.”

International: A ‘juggernaut,’ and growing

Doyle said the chain’s 70-country international system, which he called a “juggernaut,” would be a primary focus of expansion in the future.

“There’s more runway in international than I’m going to have to worry about in my career or maybe my lifetime,” Doyle said. “That business is roughly the same size as our domestic business, but only 5 percent of the world’s population lives in the U.S. There are only a few markets in international that are close to reaching maturity.”

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Most of the growth will come in established foreign markets for Domino’s, he added, but the brand may add 10 to 20 countries in the future.

RELATED: Domino's international business to drive growth in 2011

Domino’s international franchisees have opened a net 228 stores year-to-date. Doyle pointed out several exemplary master franchisees, including Domino’s U.K., which opened 15 new stores in the quarter and is on pace to open 60 units in the United Kingdom and Ireland, and four locations in Germany. Domino’s U.K. increased its same-store sales 4.1 percent this quarter, compared with an 11.5-percent increase a year earlier.

The chain’s master franchisee in India just opened its first unit in Sri Lanka. The master franchisee in Australia, which also operates several territories in Europe like France and the Netherlands, recently reported full-year results, including its largest gain in annual same-store sales in more than a decade in Australia. Same-store sales in New Zealand grew 13.2 percent for the year, and the franchisee’s European markets were up mid-single digits in same-store sales.

Even amid strong sales trends, unit-level economics still ultimately would determine the pace of new-unit growth abroad, Doyle said.

“Stores get built because cash-on-cash returns are good,” he said. “But when comps are up as much as they’re up in international, it means the outlook is very good for store growth.”

Domino’s Pizza operates 395 restaurants and franchises another 4,496 locations in the United States, and franchises another 4,650 units in more than 70 international markets.

Contact Mark Brandau at [email protected].
Follow him on Twitter: @Mark_from_NRN

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